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Cannabis

Licensed Cannabis the Next Big Thing

This year’s Cannabis World Congress & Business Exposition New York (CWCBExpo NY) welcomed a disparate crowd as businesses sought to stake a claim in an industry estimated to be worth $5.7 billion in the U.S. in 2015, according to ArcView Market Research and New Frontier. While TLL estimates place retail sales of licensed legal cannabis at less than 1% of all industry sales, the immaturity of the business means branding is underdeveloped. The greater market grew 24% from 2014 ($4.6 billion) and is expected to grow another 26% to $7.1 billion in 2016—and licensed goods are expected to grow at a much faster rate, especially as legalization expands.

Retail sales of licensed (as in, branded) cannabis products total $60–100 million dollars in the U.S., according to TLL estimates. In effect, licensed sales make up less than 1% of all retail sales of legal cannabis. These products include concentrates, infused edibles, flowers as well as patches, soft gels, food and beverages—in addition to related accessories such as vape pens, pipes, grinders and tins. Sales figures are notoriously difficult to pin down for branded goods, as many deals are co-branded, function as marketing partnerships or operate in an essentially legal gray zone.

Cannabis licensing is an entirely different beast than any other product category. Deals with products containing above 0.3% THC must be done state-by-state due to federal prohibitions. The same prohibitions mean that royalty fees cannot be collected on licensed sales. Instead, most contracts provide for a flat fee per sale to be paid to the licensor. And thanks to varying packaging, labeling and other assorted regulations contracts and products should vary for every state. Each state’s tax laws can also affect pricing structure; mark-ups can vary anywhere between 100–300% for essentially identical products.

The marketplace is far from a stable, solid profit center—and the state-by-state restrictions for legal marijuana mean that brands will have difficulty breaking into the space on a grand scale. The lack of interstate distribution also means that there is little to no standardization of products, as and licensed lines will usually partner with one major source per state.

Today’s cannabis brands are largely regional; there are only two major brands that can be said to command nationwide recognition, High Times and NORML. The strategy behind regional brands tends to be to expand to neighboring states as legalization expands. The upside to licensed brands is that this issue can be avoided altogether.

The first brands to expand into licensed cannabis are music artists such as Bob Marley and family, Willie Nelson and Snoop Dog. See here for TLL‘s live chart of celebrities that have lent their names to a marijuana brand. Robert Hunt, Partner at Tuatara Capital, believes that the future lies beyond those celebrities who are part of the “stoner culture.” The next big influx of branded merchandise is likely to be celebrity chefs, who use cannabis regularly in cooking edibles. And although many sports athletes have shown support for the industry, none as of yet have thrown their names to a branded line. The problem so far, Hunt says, is that brands are unprepared to handle the legal issues and consumer research necessary to break into the market.

The perception is clear: legalization will happen. Businesses are focused on planting the seeds for expansion, and the crutch lies with brands now in identifying those that will be best positioned to exploit the future market. This year is a watershed moment for the industry; seven states will be voting to allow adult recreational use, including California, Nevada, Arizona Massachusetts, Maine, Rhode Island and Vermont.

Know Your Product

Cannabis product can be divided into three major “types”:

THC is the primary psychoactive ingredient in marijuana and the most well-known cannabinoid. Cannabis strains with more than .3 percent of THC are legally regulated.

CBD or cannabidol, which is sold as an extract or purification in health and beauty aids such as pills as well as food and beverages. The ingredient is espoused for its health and wellness applications thanks to its anti-inflammatory, analgesic and seizure reduction properties. Cannabidol is legal nation-wide.

Industrial hemp, the non-psychoactive strain of cannabis, is used for food and fiber production. Compared to strains grown for recreational usage, hemp has low concentrations of THC and higher concentrations of CBD. Some companies refer to their products as hemp rather than CBD.

Shedding the Stoner Image

Growers and distributors new to the business are often struggling with weeding through legal regulations and securing funds (businesses cannot deduct operating expenses or use traditional banking). Most are new to branding and marketing. That is not to say that some companies do not; and in fact, they were the highlight of the show.

The overall focus over the three days was a bid for the industry to shed the stoner image. CWCBExpo NY was rich with educational non-profits and political candidates as well as women’s and consumer advocacy groups intent on normalizing the culture. A large part of that mission involves adjusting the branding of the entire industry, according to David Paleschuck, President of New Leaf Licensing and VP Licensing & Brand Partnerships at Dope Magazine. Instead of “marijuana,” or “weed,” which have negative connotations and imply the presence of THC, the term “cannabis” is used. Instead of “smoking,” the more accurate “consumption” reflects changing consumer habits. Emphasis in marketing is placed on safety, testing and clear labeling.

Over half of cannabis sales are for non-smoke products, and businesses throughout the show stated that their most popular lines are edibles or processed cannabis to be used with vape pens and other discrete, often odorless systems. One company provided a unique twist to an age-old method: CannaKorp showcased a Keurig-like single-use, pod based cannabis vaporizer system. To be released later this year, the company will partner with selected cultivators to provide an array of cannabis brands for each state, with both THC and CBD strains. The sale of each pod brings in $1 in fees.

And most activity at the show was focused on CBD, which is used in everything from body lotion to gell caps to soda.

Who’s Using?

The largest hurdle for the industry is identifying the cannabis consumer; their lifestyle, aspirations and the type of brand imagery that will speak to them.

The largest markets are Colorado, California and Washington. See TLL‘s LAWSCAPE map depicting the legal status of marijuana in all 50 states. Each state will have different target audiences, depending in part on whether state law allows for recreational use. In California, for example, the fastest growing consumer group are Boomers 55+ years-old, due to educational outreach efforts, and young men aged 21-34 who are considered ‘heavy users’ (consuming cannabis several times a week) make up 51% of purchases. Nationwide, 40% of legal cannabis consumers are aged 25–34 years-old, 21% are 18–24 years-old and 15% are 35–44 years-old, according to Leafbuyer.com. And only 55% of buyers are male.

According to the Brightfield Group, over a third of American consumers would pay more for organic or premium strains. More than the typical consumer, quality and safety are important to cannabis buyers. Branded products that emphasize luxury as well as convenience are essential in fulfilling this need.

Keith Stroup, Founder, Legal Counsel & Director of NORML (National Organization for the Reform of Marijuana Laws) identifies several issues that must be addressed to normalize cannabis and encourage business activity. While consumers seek safety and convenience, there are no established testing and labeling standards that each producer must adhere to. Another hurdle to surpass is eliminating punitive (and often scientifically unsound) testing for THC in workplaces, on the road and in homes. NORML provides its service mark for brands that have met its standards.

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